InnOvation Capital & Management, LLC
IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
OCTOBER 25 , 2017
Contact Richard Power with comments or questions. IntelDigest is intended for the use of our clients and colleagues. Material may not be reproduced, forwarded or shared without express permission.
This week in IntelDigest, we present the last installment of our 4-issue essay on Cryptocurrencies; we use the shorthand designation, Cryptos, to refer to these digital currencies.
In earlier issues this month, we covered the underlying technology for most digital currencies, known as Blockchain. We have outlined the workings of the Blockchain technology … a decentralized “distributed ledger” system … and some of its game-changing potential. The development of Cryptocurrencies is the first and most obvious use of the technology; and, Bitcoin is its first “killer app.”
Bitcoin is the “proof of concept” that Blockchain technology works as intended. The success of Bitcoin has proven that it is possible for independent and fragmented entities (referred to as “miners” or “nodes”) to process/enable the exchange of value between strangers, with no need for an intermediary. And, do so in a transparent, verifiable, and open manner.
In this issue, we discuss the process of speculating in digital currencies, and the safest Cryptos on which to risk your money. Cryptos now number over 1,000, but 99% are pure speculations.
The most “reputable” are Bitcoin and Ethereum.
Ascension of Bitcoin
The advantage of Bitcoin is that it was the “first adopter” of the Blockchain technology. It is an amalgam of decades of innovation in applied cryptography, which began with the military in the 1970s and was continued by independent computer programmers in the 1990s. It is the template for most of the Cryptos which followed.
Bitcoin marked the birth of Cryptocurrencies in 2009, soon after the bottom dropped out of the global economy. Is it any wonder that people were seeking an alternative financial system to the one which had left so many broke and dispirited?
Bitcoin is the first of the Cryptocurrencies, and, arguably, the most stable. It has established a market value, which is volatile; over the course of this calendar year, Bitcoin has climbed from just under $1,000 per bitcoin to almost $6,000 per bitcoin. Bitcoin can be purchased in fractions of bitcoins.
Ethereum
While Bitcoin was focused on creating a store of value and a currency, Ethereum takes the Blockchain further. Sure, Ethereum is another form of currency. However, the avowed purpose of Ethereum is the creation of “smart contracts” and the construction of decentralized applications on the Blockchain.
Property and contract law are the fundamental building blocks of commercial society. Smart contracts would enable enforcement in a decentralized manner, which would be faster, easier, and less costly than the traditional legal system.
Once set into a blockchain, smart contracts would become immutable and unstoppable. Anything “signed” onto the blockchain becomes global and permanent. Data and programs can be auditable by anyone.
In this way, it would become impossible to renege on a “contract” or a decision once it’s coded and set into motion on the blockchain. And, anyone can audit the blockchain and prove the existence and terms of a transaction.
One of the co-creators of Ethereum is Vitalik Buterin, a Canadian programmer of Russian extraction. His vision of smart contracts:
“Ethereum can be used to codify, decentralize, secure and trade just about anything: voting, domain names, financial exchanges, crowdfunding, company governance, contracts and agreements of most kind, intellectual property, and even smart property thanks to hardware integration.”
So, Ethereum, which trades for just under $300 per coin, would appear to have a high ceiling and a much more utilitarian future than other Cryptos.
If you have an interest in speculating in these, or other, Cryptos, please seek out more information before committing your money. Do NOT forget that Cryptos … at this time … are more speculation than they are investment. And, there is no simple vehicle, like a mutual fund, which trades digital currencies.
The Process
The first step in speculating in Cryptocurrencies is to set up an account with an Exchange. We will mention a few here. An Exchange may be just a secure platform for buying and selling Cryptos, or it could be a regulated financial institution … similar to banks and stock brokerages … which can set up your account in Dollars, link to your bank account, then purchase Cryptos for your account.
The largest digital currency exchange is Coinbase, which is a secure platform for buying and selling Cryptos. It is easy to set up, but has the highest fees. It is also limited to Bitcoin, Ethereum, and Litecoin.
Gemini has lower fees than Coinbase; it, too, currently handles only the most recognized currencies. Gemini is regulated as a trust company in New York State.
Two other exchanges are Kraken and Bittrex, which can handle more cryptocurrencies, but are more difficult to use. Example: you may be able to find a Crypto which you prefer on Bittrex. But, you can only buy on Bittrex using Cryptocurrencies. So, you would have to have an account on Gemini or Coinbase, which can convert your Dollars into Bitcoin or Ethereum. Then, transfer your bitcoin or ether to Bittrex in order to buy another Crypto.
Your Wallet
Having purchased an amount of Crypto, you then have to store your “coins” in a Wallet. You can keep your currencies stored on the Exchange, which is easy but not very secure. The more secure method … one where you keep control over your asset … is to transfer your Wallet to one or more encrypted hard drives (or thumb drives) which you can secure.
Keys
Think of your Wallet as your bank account. Now you need the Keys to transfer assets into and out of your wallet. Each wallet has a unique address associated with it. Here’s what a public wallet address looks like:
1PUA99Fyco1hQRpwwmstfDP2xmvZMyAiK8
This is a public address; you don’t have to keep it secret. Anyone can send coins to that address if you provide it to them.
To open the wallet, however, you need a private key, or password. A private key is, preferably, a very long password which determines your ownership of the cryptocurrencies in the wallet.
You would need to keep your private key (password) secure. And, you should back up your wallet onto two other encrypted drives.
Alternative Crypto Investment Vehicles
At this time, the only investment funds which invest in Cryptocurrencies have high fees and are limited to high-income “accredited” investors: Metastable, Crypto20, The Token Fund, and HOLD 10 Private Index Fund from Bitwise.
We will update you on developments in this industry as Cryptos gain greater credibility and acceptance in the marketplace and among regulators.